Global bond rout deepens as investors punish government spending

Bond yields across the world’s biggest economies have climbed to multi-year and multi-decade highs this week, as investors sell government debt over fears of unchecked spending and sticky inflation. The selling pressure is not just in the United States. France, Germany, Italy, the United Kingdom, Japan, Canada and Australia are all seeing yields rise.

Yields rise when bond prices fall. And because bond yields set the cost of borrowing across the economy, a sustained jump can make mortgages, auto loans and student debt more expensive for households and businesses.

Why investors are dumping bonds

The root cause is investor unease over government spending, amplified by bets that central banks will keep interest rates higher for longer. Energy prices tied to the war with Iran are making inflation stickier, and that raises the risk that central banks will hold rates high or even raise them further. Governments may then step in with subsidies to shield consumers, adding more spending and more debt to the pile.

“At this stage, the bond market is not signaling a crisis,” Kristian Kerr, head of macro strategy at LPL Financial, wrote in a note. “However, it is sending a warning that merits attention.”

Bond yields eased on Thursday after the sharp run-up earlier in the week. But investors say the forces pushing yields up are not going away.

War, debt and the end of cheap money

Marko Papic, chief investment strategist at BCA Research, said the market is reacting to the chance of a prolonged crisis. “The global bond market is reacting to the potential danger that this is a prolonged crisis, and then governments have to spend more money,” he told CNN. Elevated uncertainty over the length of the war is compounding the nerves, he added, while relatively strong global economic growth is also lifting yields.

The bond market has humbled governments before. In 2022, then British Prime Minister Liz Truss was forced out after just 44 days in office when the bond market revolted against unfunded fiscal spending and tax cuts. In Japan, the 10-year yield hit 3% this week, its highest level in 30 years. Japan’s yields have climbed as the Bank of Japan started raising rates after decades of ultra-loose monetary policy, and investors remain wary of a massive debt burden.

Governments have ramped up spending in recent years, pushing debt burdens higher. Bond yields have risen sharply since the Covid pandemic after central banks hiked rates aggressively in 2022 to fight inflation. The era of ultra-low interest rates that followed the 2008 financial crisis is over, analysts say. The problem now: much bigger debt loads.

Tom Tzitzouris, head of fixed income research at Baird Strategas, put it bluntly. “Governments are spending too much, and you can put fighting wars in that category,” he told CNN. “We can’t avoid this other than ceasing spending, and even if the US were to pull back, the rest of the world has got to as well. Governments have got to pull back their spending. That is the problem.”

More supply, more pain ahead

The current move is not a sudden panic but a steady, sustained push higher in yields. Joe Brusuelas, chief economist at RSM US, said global investors are looking at “a potent mix of higher inflation, higher interest rates and an unsustainable fiscal path.”

At the same time, technology companies are issuing more debt to fund the buildout of AI infrastructure. That adds to the growing supply of bonds in the market. Investors want more compensation for lending, so yields stay elevated.

Unless governments rein in spending and raise taxes, or tech firms scale back their AI plans, the pressure is unlikely to ease. Neither scenario seems likely soon. As Brusuelas put it: “You put all of those together, you’ve got a recipe for a global increase in interest rates, which means everything that touches credit in the major economies is about to get much more expensive.”